The Act
proposed to be created by this Bill is consequential on the repeal
of the Petroleum (Submerged Lands) (Royalty) Act 1967 and is
its replacement in conjunction with the Offshore Petroleum Bill
2005 and other Bills achieving the rewrite of the Petroleum
(Submerged Lands) Act 1967 and incorporated Acts. This Bill
sets out the royalty payable in respect of petroleum produced in
the North West Shelf project area under the proposed Offshore
Petroleum Act. For a reason explained in the notes on individual
clauses, certain provisions about determining the rate of royalty
are also proposed to be transferred from what is currently in the
Petroleum (Submerged Lands) Act to this Bill. On the other hand,
provisions about when provisional or determined royalty is due for
payment, late payment penalty and recovery of royalty debts are
proposed to no longer be part of the Royalty Act and have been
placed instead in Part 4.6 of the Offshore Petroleum Bill
2005.

The existing
Petroleum (Submerged Lands) (Royalty) Act applies, and this Bill,
as its proposed replacement would apply, only in the abovementioned
geographic area. The basis of this is a decision by Parliament in
1987 to introduce petroleum resource rent tax for all petroleum
projects except those in areas covered by production licences
granted on or before 1 July 1984 and the wider exploration permit
areas from which those production licences were drawn. Production
from these titles remained subject to royalty under the Petroleum
(Submerged Lands) (Royalty) Act. Following another subsequent
amendment to the petroleum resource rent tax legislation, the only
titles that now remain under the coverage of the Petroleum
(Submerged Lands) (Royalty) Act are those in the North West Shelf
project area.

FINANCIAL
IMPACT STATEMENT

The intention
of rewriting the Petroleum (Submerged Lands) (Royalty) Act is to
maintain current policy, meaning there would be no financial
consequences from the rewrite itself. However, an incidental policy
change with a minor financial impact is proposed in this Bill. This
is the provision whereby, if a royalty payer, in monthly
remittances of royalty, has made an overpayment, through
finalisation of a provisional payment or by an error in calculation
or procedure, and the petroleum operation comes to an end with no
further royalty payments, the royalty payer would be able to obtain
a refund equal to any overpayment in the final
remittance.

This differs
from the provisions of the existing Royalty Act, which allows
overpayments to be accounted for by means of credits in future
months’ payments but recognises no possibility of a refund
when all payments have ended. This policy inconsistency is proposed
to be rectified in this Bill. The change is not expected to have
any significant impact on Australian Government revenues as the
cessation of production operations in the North West Shelf project
area will be a rare event and the total of any refund, assuming one
were required, would be unlikely to exceed an amount in the
thousands of dollars.

NOTES ON
INDIVIDUAL CLAUSES

Clause 1 - Short title

This clause is a standard provision setting out
the title by which the proposed Act is to be cited if it becomes
law.

Equivalent
provision in P(SL) (Royalty) Act : section 1.

Clause 2 -
Commencement

This clause
provides that clauses 1 and 2 would commence on Royal Assent to
this Bill. The remaining clauses and Schedule 1 would commence
together with the bulk of the provisions in the Offshore Petroleum
Bill. This is to be on a date fixed by proclamation. However, a
separate proclamation of the Offshore Petroleum (Royalty) Act would
not be required.

The main effect of this clause is that, where
terms are used undefined in this Bill, they could be defined in
Chapter 1 of the Offshore Petroleum Bill, in which case they would
have application to this Bill.

Equivalent
provision in P(SL) (Royalty) Act : section 3

Clause
4 -
Definitions

This clause
effectively defines the geographic area to which this proposed Act
would apply. It is the North West Shelf project area, as defined in
the Petroleum Resource Rent Tax Assessment Act 1987 ,
consisting of areas under permits, leases or licences derived from
the North West Shelf exploration permits WA-1-P and
WA-28-P.

The policy
background to the existence of primary and secondary production
licences is as set out in explanatory note to clause 2 in the
Schedule 4 to the Offshore Petroleum Bill. In summary, when
petroleum is discovered in an exploration permit area in the North
West Shelf project area, a location may be declared which consists
of the blocks which overlie the petroleum pool. The exploration
permittee may then apply for a production licence over
approximately half (or less) of the blocks of the location as a
primary entitlement. If granted, this is called a primary
production licence . Once a production licence has been
granted over all blocks constituting the primary entitlement, a
production licence granted over any or all of the other blocks in
the location constitutes a secondary production licence.

Alternatively,
the permittee could seek a retention lease over the blocks and thus
delay applying for a production licence. Eventually, a similar
arrangement will apply to the lessee as would have applied if that
party had sought a licence as a permittee.

The royalty
periods are defined as calendar months, or parts thereof, for
reasons of administrative efficiency.

Equivalent
provision in P(SL) (Royalty) Act : sections 4 and 4A

Clause
5 - Imposition of
royalty

This clause
imposes a petroleum royalty on the registered holder of an
exploration permit, retention lease or production licence in the
North West Shelf project area only.

Royalty is
levied as a percentage of the wellhead value which is calculated by
subtracting, from sales receipts: excise, operating costs such as
processing and transportation, and allowances for post-wellhead
capital assets and depreciation.

While petroleum
production would normally occur under a production licence, it is
conceivable that saleable petroleum could be produced during the
exploration phase of a well development under an exploration permit
or a retention lease, especially where appraisal testing is being
carried out.

The royalty
payment arrangements applicable to the registered holder of any one
of these titles are set out in Division 3 of Part 4.6 of the
Offshore Petroleum Bill. In summary, royalty on petroleum produced
in one calendar month is payable by the last day of the following
calendar month.

Subclause 6(1)
provides for a number of different rules for determining the
royalty rate applicable to a production licence depending on the
circumstances under which the licence is granted.

Item 1 of the
table sets the standard royalty rate for a primary production
licence at 10% of the value of the petroleum at the wellhead, that
is, the value as the petroleum is extracted. This value is
derived from the sales value by deducting the costs of transport,
separation and storage.

Item 2 of the
table allows for a higher royalty rate to be payable for a
secondary production licence. The policy background to this is
explained in the explanatory memorandum note about clause 2 in the
Schedule 4 to the Offshore Petroleum Bill.

Items 3 of the
table allows for an increase in the royalty rate for a production
licence when a secondary production licence is taken out in respect
of all or some of the remaining blocks in the location. The
increased royalty rate will apply from the beginning of the next
month.

Item 4 of the
table refers to the provision in the proposed Offshore Petroleum
Act whereby the Joint Authority, when so requested by the holder of
a production licence, must give the holder two or more separate
licences in lieu of the initial licence, assuming the initial
licence area consists of two or more blocks. This item applies the
same royalty rate to the derived production licences as applied to
the initial production licence.

Item 5 of the
table provides that the royalty rate on a renewed production
licence remains the same rate as on the previous
licence.

Subclause 6(2)
provides that, when an application for a secondary production
licence is made, the Joint Authority must determine a royalty rate
to be applied to all petroleum recovered subsequent to the grant of
the secondary licence, whether in the area covered by the primary
licence or the area covered by the secondary licence. This
provision has been transposed from the provisions that appear in
the Petroleum (Submerged Lands) Act and placed in this Bill rather
than in the Offshore Petroleum Bill. This is for reasons indicated
in the note about clause 341 in the explanatory memorandum to that
Bill. Essentially, this provision is proposed to be inserted in
this Bill because it is about the creation of the royalty liability
and discussion of the royalty base and, as such, it more
appropriately belongs in the enactment that imposes the
royalty.

Subclause 6(3)
limits the royalty rate on secondary production licences to between
11% and 12.5% inclusive. The background to the inclusion of this
provision in this Bill is the same as the one applicable to
subclause 6(2).

Subclause 6(4)
provides for consultation between the Joint Authority (consisting
of the Commonwealth and Western Australian Ministers responsible
for petroleum resources) and the prospective licensee through the
Designated Authority (ie the Western Australian Minister
responsible for petroleum resources) before the Joint Authority
makes a determination of the rate of royalty payable upon the grant
of a secondary production licence. The background to the inclusion
of this provision in this Bill is the same as the one applicable to
subclause 6(2).

In accordance
with current drafting practice, subclause 6(5) makes clear that a
determination under subclause 6(2) is not a legislative instrument
in terms of the Legislative Instruments Act 2003.

Subclause 6(6)
refers to the possibility that a production licence may refer to
the payment of royalty at the “prescribed rate” and
makes it clear that this rate is the rate determined by the
provisions of the proposed Royalty Act. That rate could be
different at one point of time than at another, for example because
of the licensee taking out a secondary production licence in
addition to a primary production licence or because a situation of
a potentially uneconomic well has arisen, as referred to in clause
9.

Technical
change : omitting a
redundant mention of a cash-bid production licence possibly having
a condition providing a special royalty rate (a vestige of a
provision which has not been in force for some time)

Clause
7 - Rate of
royalty—exploration permit

While
commercial petroleum extraction would normally be undertaken under
a production licence, during the exploration stage test production
may occur and the resulting petroleum may be sold. This
clause applies a 10% royalty to petroleum recovered under an
exploration permit, except if a lower rate is determined under
clause 9.

Subclause (2)
refers to the possibility that an exploration permit may refer to
the payment of royalty at the “prescribed rate” and
makes it clear that this rate is the rate determined by the
provisions of the proposed Royalty Act. That rate could be
different at one point of time than at another if a situation of a
potentially uneconomic well arises, as referred to in clause 9. In
the case of an exploration permit, reduction of the royalty rate
for this reason would be less likely than under a production
licence.

Equivalent
provision in P(SL) (Royalty) Act : subsection 5(8)

Clause
8 - Rate of royalty—retention
lease

A retention
lease may be issued following a discovery of petroleum,
specifically where production is not commercially viable but is
likely to become so within 15 years. Under a retention lease,
appraisal production may occur to provide information on the
commercial potential of the lease and the resulting petroleum may
be sold. This clause applies a 10% royalty to petroleum
recovered under a retention lease except if a lower rate is
determined under clause 9.

Subclause (2)
refers to the possibility that a retention lease may refer to the
payment of royalty at the “prescribed rate” and makes
it clear that this rate is the rate determined by the provisions of
the proposed Royalty Act. That rate could be different at one point
of time than at another if a situation of a potentially uneconomic
well arises, as referred to in clause 9. In the case of a retention
lease, reduction of the royalty rate for this reason would be less
likely than under a production licence.

Equivalent
provision in P(SL) (Royalty) Act : subsection 5(8)

Clause
9 - Reduction of
royalty—potentially uneconomic wells

This clause
allows the Joint Authority to make a determination that the royalty
rate be lowered in a particular case if the Designated Authority is
satisfied that the rate of recovery of petroleum from the well in
question has become so reduced that further recovery would
otherwise be uneconomic.

Thus a determination to lower the
rate of royalty could be reversed if, for instance, changes in the
economics of production warranted it.

Equivalent
provision in P(SL) (Royalty) Act : section 6

Clause
10 - Exemptions from
royalty

This clause
sets out the various scenarios under which recovered petroleum
might not be sold, or immediately sold, ie unavoidable loss prior
to volume measurement, use by the titleholder in approved petroleum
exploration and recovery operations, approved venting or flaring
and approved reinjection into a natural reservoir (whether or not
the same reservoir as the one from which it was originally
produced.) The latter two scenarios could occur, for example, if
petroleum were recovered from a well, separated into liquids and
gases and, for economic or operational reasons, the gases could not
be piped or shipped away from the production facility. Since, in
all these cases, there is no sale of a part of the recovered
product, that part is not subject to royalty.

Subclause (3)
ensures that, if reinjected petroleum is subsequently recovered,
the exemption from royalty under subclause (2) no longer operates
in relation to that petroleum.

Equivalent
provision in P(SL) (Royalty) Act : section 7

Clause
11 - Meaning of
wellhead

The wellhead is
the point of valuation of petroleum for royalty purposes and would
normally be a valve close to the
petroleum extraction point. Determining where the wellhead is has
significance because it can affect what costs attributed to the
construction and operation of plant may be included in calculations
leading to the determination of product value at the
wellhead.

This clause
allows the wellhead location to be agreed between the Designated
Authority and the petroleum producer or, if no agreement is
reached, by determination of the Designated Authority. The Joint
Authority must direct the Designated Authority in this matter under
clause 14.

Equivalent
provision in P(SL) (Royalty) Act : section 8

Clause
12 - Meaning of
value

The value of
petroleum at the wellhead is derived from the sales value with
deductions for processing, transport and storage. This clause
allows for the valuation to be the one agreed by the petroleum
producers and the Designated Authority or, if no agreement is
reached, by determination of the Designated Authority. The
agreement would normally be in the form of a royalty schedule which
lists the agreed deductions. The Joint Authority must direct
the Designated Authority in this matter under clause 14.

Equivalent
provision in P(SL) (Royalty) Act : section 9

Clause
13 - Quantity of petroleum
recovered

The quantity of
petroleum recovered is to be measured by a device approved by the
Designated Authority installed at a location approved by the
Designated Authority. The measuring device need not necessarily be
installed at the wellhead. This is because measuring instruments
may be located at various places along the transport routes to
allow calculation of wellhead volumes by derivation.

If the
Designated Authority or the Joint Authority is not satisfied that
accurate and proper measurements have been made, the volume may be
determined by the Designated Authority. The Joint Authority must
direct the Designated Authority in this matter under clause
14.

Equivalent
provision in P(SL) (Royalty) Act : section 10

Clause
14 - Directions by Joint
Authority

For the
offshore area adjacent to Western Australia (the only State
affected by the proposed Royalty Act), the Commonwealth Minister
administering the proposed Act and the Western Australian Minister
responsible for petroleum resources are together the Joint
Authority and the Western Australian Minister is the Designated
Authority. In relation to clauses 11, 12 and 13, this clause
provides that the Joint Authority must give directions to the
Designated Authority on how to determine the wellhead position,
petroleum value and petroleum volume. A separate direction
instrument is to be given in respect of each petroleum producing
title that exists in the North West Shelf project area. The
Designated Authority must comply with the Joint Authority’s
direction.

This
direction-giving power and responsibility of the Joint Authority
relate to the fact that the offshore area is in the Commonwealth
marine jurisdiction and the Commonwealth should therefore be in a
position to control the policy applying to resource extraction
charges.

In accordance
with current drafting practice, subclause 14(4) makes clear that a
direction under subclause 14(1) is not a legislative instrument in
terms of the Legislative Instruments Act 2003.

Equivalent
provision in P(SL) (Royalty) Act : section 10A

Policy
change: explicit mention
that a separate direction instrument is to be given in respect of
each exploration permit, retention lease and production licence
that exists in the North West Shelf project area

Clause
15 - Provisional payment of
royalty

This clause
deals with the situation where the wellhead value of petroleum
produced in a particular calendar month has not been agreed between
the producer and the Designated Authority before the end of the
following calendar month. This could occur, for instance, because
either sales revenues or some post-wellhead deductions are at that
time still undetermined. In this situation, the Designated
Authority may determine a provisional value on which the royalty
liability will be calculated.

Equivalent
provision in P(SL) (Royalty) Act : section 11A

Clause
16 - Adjustment of payments of
royalty

This clause
refers to situations where a provisional value for royalty has been
determined under clause 15 or an error was made in calculation or
procedure. An example of an error of procedure could be some
misunderstanding which leads the Designated Authority to believe an
agreement has been reached with a titleholder about the value of
production during a particular month when in fact there is no such
agreement.

In these cases,
an adjustment to the royalty paid based on the provisional
valuation or the erroneous royalty amount will be made, either by
an additional amount of royalty payable by the registered holder or
a reduction in the subsequent royalty liability of the registered
holder.

In the event
that a subsequent royalty liability does not exist, for example
after petroleum extraction has ceased, a refund of the overpaid
amount will be made to the registered holder.

Equivalent
provision in P(SL) (Royalty) Act : section 11B

Policy
changes : the introduction
of a provision for a refund of royalty in the circumstance where a
final royalty payment has been made; making explicit that the
erroneous application of a procedure for ascertaining the value of
petroleum is classed as provisional royalty

Clause
17 - Transitional
provisions

This clause
gives effect to the transitional arrangements in Schedule 1. This
will maintain the existing administrative framework for collecting
royalty, ie determinations, approvals and other instruments, and
enable royalty to be collected without interruption or double
imposition despite the repeal of the Petroleum (Submerged Lands)
(Royalty) Act and its replacement by the proposed Offshore
Petroleum (Royalty) Act.

Equivalent
provision in P(SL) (Royalty) Act : nil

Technical
change : omitting the
redundant provisions about royalty arrangements (section 12 of the
Petroleum (Submerged Lands) (Royalty) Act) in respect of Barracouta
and Marlin Fields production licences, consistent with the omission
of provisions about these licences in the Offshore Petroleum
Bill

Schedule 1 — Transitional
provisions

Schedule 1
clause 1 -
Definition

For editorial
reasons, this clause provides a collective name for the various
instruments that form the administrative framework under the
Petroleum (Submerged Lands) (Royalty) Act.

Equivalent
provision in P(SL) (Royalty) Act : nil

Schedule 1
clause 2 - Pre-commencement
royalty periods

This clause
provides that there will be a smooth interface between royalty
accounting periods when the Petroleum (Submerged Lands) (Royalty)
Act is repealed as any partially elapsed royalty period at that
date will run its course as if there had been no repeal.

The definitions
of “royalty” and “royalty period” in clause
4 of this Bill do not apply to this clause because the provision in
this clause deals with the effect of the old Act. It is therefore
appropriate that reference be made to the definitions in the old
Act.

Equivalent
provision in P(SL) (Royalty) Act : nil

Schedule 1
clause 3 -
Transitional—eligible instruments

This clause
provides that the various instruments that form the administrative
framework under the Petroleum (Submerged Lands) (Royalty) Act and
section 42 of the Petroleum (Submerged Lands) Act will all remain
effective for an equivalent purpose under the proposed Offshore
Petroleum (Royalty) Act and do not need to be
remade.

Equivalent
provision in P(SL) (Royalty) Act : nil

Schedule 1
clause 4 -
Transitional—royalty at the prescribed rate

This clause
refers to the possibility that a title document may refer to the
payment of royalty at the “prescribed rate”. This
clause makes it clear that the prescribed rate is the rate as set
out in the new Royalty Act, and, for an issue such as the recovery
of arrears incurred during the period of effect of the Petroleum
(Submerged Lands) (Royalty) Act, the prescribed rate is the
equivalent rate that existed under the repealed
Act.

Equivalent
provision in P(SL) (Royalty) Act : nil

Schedule 1
clause 5 - Transitional—rate
of royalty

This clause
refers to determinations made before the repeal of the Petroleum
(Submerged Lands) Act of the rate of royalty payable under a
secondary production licence. It also refers to a licensee having
lodged, before the repeal of the Petroleum (Submerged Lands) Act,
an application for two or more separate licences in lieu of the
initial licence and the grant of the individual licences being yet
to occur at the date of repeal.

In these cases,
this clause ensures that the determinations will stand under the
new Royalty Act and that the rate of royalty applicable to the
individual licences resulting from splitting the licence will be
the same as the rate applicable to the licence under the repealed
Act.

This clause
will provide a useful means by which other legislation could refer
to the new enactment. If other legislation refers to “the
Petroleum (Submerged Lands) (Royalty) Act 1967 or any Act
that re-enacts it”, that reference will need no change if and
when the proposed new Act comes into effect.